The challenge at hand is to reduce the wrong incentives

The last few days at COP16 have, in a low-key way, accomplished more than I have seen at the COP meeting for some time (and I have been attending them for over a decade now).

For example, there have been a series of business-led discussions and proposals on how to develop energy-efficiency master plans at all levels—company, municipality and country. An exciting aspect has been the presence of so many innovative industry partners and governments that have not only developed, but started practicing important renewable energy and energy-efficiency solutions.

I had the pleasure of moderating a stimulating event that the World Economic Forum hosted Monday that really got into the nuts and bolts of energy efficiency. This event included small NGO representatives, the venture capital community, Fortune 500 technology companies, utility CEOs from developing nations, and Energy and Environment Ministers from four nations. There have been fruitful discussions on specific mechanisms—from feed-in tariffs, community aggregation of clean energy purchase plans, to very large-scale government procurement of clean energy services.

In almost all of these discussions, not only did the ways to support clean and sustainable energy come through loud and clear, but also calls to be more transparent and balanced in the energy markets. Several private sector companies (even those whose revenues are almost entirely from fossil fuels) and economic leaders from developing nations said that all markets would function better if we reduced the massive subsidies for fossil fuels.

It is in this context that I want to talk about how creating the right climate to start and sustain these innovations depends not only on technological advances, but also on regulations and policy incentives. Many experts made a persuasive case for a price on carbon emissions as a strong incentive for positive change. In fact, most existing climate-related financing mechanisms are designed to mimic the effect that a price for carbon would have, and thereby reflect the true social, economic, and environmental costs of GHG emissions.

Along with creating the right incentives is the challenge of reducing the wrong ones. Among these are many of the existing large subsidies for fossil fuel production and consumption. The World Bank has been involved in carefully documenting these subsidies to support a resolution by the G20 at their 2009 Pittsburgh Summit. Since then, G20 and other countries have moved ahead with reforms. It’s an encouraging start, but the full potential gains will be achieved only if more countries raise their ambition on this issue.

To help them, the Bank has produced A Roadmap for Phasing Out Fossil Fuel Subsidies. This analytical toolkit can help policymakers pose key questions, quickly diagnose problems and identify the right policy responses. Key questions include: Who benefits from a subsidy? And assuming that there is a positive impact on the poor, what are the options for ameliorating those?

Some of the lessons from the report have found resonance at Cancun. These included alternatives like a well-designed rural electrification subsidies, compensation packages for the poorest and moving towards automatic price adjustments at the country level. The next few months promise to be interesting with several key players moving towards implementation of some of these.